Kyle (1985)), this idea is relatively novel to the asset pricing litera-
ture. Given that the share of institutional investors is higher in S&P
500 firms than in S&P 1500 firms, our finding of stronger abnormal
returns of firms with high managerial ownership among the first is in
line with this argument.
2. Rational equilibrium behavior
The empirical prediction of the argument is that firms with a value in-
creasing large shareholder will be characterized by abnormal returns in
a rational equilibrium, because her existence cannot be fully priced. In-
stitutional investors are viewed as more rational than retail investors
(see, e.g., Boehmer and Kelley (2005)). Given that institutional in-
vestors mainly invest in large, liquid stocks like the ones we examine,
it is likely that participants in these markets are rational. However,
demands on investors’ rationality are very high for this equilibrium
to emerge: investors have to be aware of their actions and the con-
sequences of their potential selling to an owner CEO in a relatively
complex strategic setting. Thus, the requirements with respect to the
rationality of market participants might be too demanding and not
fulfilled in existing stock markets.
3. Value increasing large shareholder
Most importantly, it is assumed that owner managers can increase the
value of their firm. While there was some debate in the management
science literature whether CEOs can actually influence the policies and
performance of their firms (see, e.g., Hannan and Freeman (1989) and
Finkelstein and Hambrick (1996)) for several years, this view is now
24
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